Gold Investment Reflects Investor Concern Over Monetary Stability

Gold prices are also strengthening on signs that increasing global stimulus measures will boost investor demand for a hedge against inflation.

The European Central Bank stands ready to activate its bond-purchase program if governments fulfill necessary conditions, ECB President Mario Draghi said. Total inflows in commodities ETPs were $3.1 billion last month, taking assets under management to $201.6 billion for Blackrock Inc alone according to Bloomberg. Gold makes up a mere 0.05% share of global household net worth, and therefore, small incremental allocations into bullion or gold investments can exert a dramatic impact.

Gold cannot be printed by central banks and is a monetary metal that is no government’s liability. It is malleable and its supply curve is inelastic over the intermediate term. And central banks, who were selling Gold during the higher interest rate times, are now reallocating their Forex reserves towards Gold, especially in Asia.

Europe’s uncertainty – A Volatility factor for Gold:
The Fiscal Cliff makes the Fed’s job that much harder. Gross domestic product would shrink by 0.5% next year and joblessness climb to about 9% if it isn’t averted, according to the Congressional Budget Office. Bernanke has said he lacks tools strong enough to offset such an impact on growth. The Fed bought $2.3 trillion in securities in its previous two rounds of bond-buying and has swapped its short-term Treasurys with longer-term securities in a program called Operation Twist, due to expire in December.

The US has more in common with heavily indebted southern European countries than it might like to admit. And if the country doesn’t reach agreement on deficit reduction measures soon, the similarities could become impossible to ignore. The looming US Fiscal Cliff may get resolved or somehow delayed – one way or another by December 31.

But the major point in contrast is that the European debt crisis is of an unknown nature. There is no fixed date for Europe like there is for the US. The Greeks are saying they are going to run out of money in the middle of November. Maybe they can stretch it until early December, but that won’t end the uncertainty coming out of Europe. For instance, we still don’t know when Spain’s Prime Minister is going to formerly ask for assistance so that the ECB can begin buying and supporting their bonds.

The issue which had seemingly died down in Europe is now resurfacing – A Greek exit. The constant uncertainty surrounding the eurozone seems to weigh heavily on the euro and all efforts towards a rise against the US dollar seem pointless. This in turn has been keeping Gold prices in check as Gold moves adversely to the US dollar. As for the upside momentum in Gold to sustain – We still have the Iranian situation, and nothing is resolved in Syria. Problems between China and Japan are now beginning to affect the Japanese economy.

What if the Fiscal Cliff gets triggered?
If the Fiscal Cliff gets triggered, Americans will be facing a different, much more real horror scenario: In just a few weeks' time, thousands of children could be denied vaccinations, federally funded school programs could screech to a halt, adults may be forced to forego HIV tests and subsidized housing vouchers would dry up. Even the work of air-traffic controllers, the FBI, border officials and the military could be drastically curtailed. That and more is looming just over the horizon according to the White House if the country is allowed to plunge off the “fiscal cliff” at the beginning of next year.

In total, the cuts add up to $1.2 trillion over the next nine years, with half coming from the military and half from other government programs, and with $65 billion coming in the first year alone. They were enshrined in law with the Budget Control Act of 2011, which also increased the debt ceiling. The “fiscal cliff” also includes the expiration of tax cuts for the rich, which were originally passed by President George W. Bush and extended by Obama.

The elimination of the lower tax rates would, according to the Congressional Budget Office, result in $221 billion in extra tax revenues in 2013 alone. A temporary 2% federal income tax cut would also expire, resulting in an additional $95 billion flowing into government coffers next year. There are also several other cuts and tax hikes included in the austerity package. Some $18 billion in taxes would come due as part of Obama’s health care reform, and welfare cuts would save $26 billion.

Should lawmakers not reach agreement prior to the end of the year, the US budget deficit for 2013 would be cut almost in half, to $560 billion. A year ago, Standard & Poor’s withdrew America’s top rating, justifying the measure by pointing to the unending battle over the debt ceiling. The agency noted that “the political brinkmanship of recent months highlights what we see as America’s governance and policy making becoming less stable, less effective, and less predictable than what we previously believed.”

What, then, is the solution? In the end, the US could arrive at a compromise similar to the one that appears to be forming for Greece: Austerity Measures combined with more time to achieve budget deficit reduction targets. The drastic cuts currently looming are essentially a kind of debt brake, but it is one with no flexibility built in whatsoever.

Economic problems in Greece and the resulting austerity packages it has passed have plunged the country into five straight years of recession. Germany, Europe and the entire world is hoping that the same fate is not in store for the US, as that would have a horrendous effect on the entire Global Economy.

Gold and Silver await an Inflation Breakout:
A fiscal boost to the economy is probably off the table as President Barack Obama negotiates revenue increases and spending cuts with leaders of a Democratic-controlled Senate and a House of Representatives led by Republicans. That may leave only the Fed in the position of trying to boost the economy, and its third round of quantitative easing may extend through next year and climb past $1 trillion Financial markets have yet to understand the economically catastrophic implications of a second Obama term.

By the time it does, it would be too late. There is nothing Romney could have done to avoid the Depression that looms ahead. However, a Romney presidency might have at least served as a reality check at an earlier date.

Now, with a $16+ trillion Federal deficit that is growing by more than a trillion dollars per year, the nation’s descent toward insolvency can only accelerate, further widening the gap between tax revenues and outlays. The too-big-to-fail banks are all a lot bigger now than they were in 2008, and none of them are any more stable or less prone to the massive correlation of similar asset mixes and counter-party exposure (namely themselves) that if pierced will trigger another crisis.

Charts and graphs may not indicate the kind of volatility that is bound to be seen because we are in the midst of a manipulated economy. Most Economic data reports are easily manipulated to serve the day’s purpose. The government, both Republicans and Democrats, have “discovered” that they can fake Economic Growth by running fiscal deficits.

This in turn results in nominal GDP values that look much better than the truth really is, and that in turn spurs people to do foolish things, such as spending money and increasing leverage into what is a factually-deteriorating economic picture. The price of gold and silver will explode once all manipulation goes out of control and the currency war really takes off. The Federal Reserve is trying to stimulate the unemployment, which is one of their dual mandates.

At the same time, they are pouring money into the economy as fast as possible, hoping for an inflationary productive cycle. That’s a path to disaster. It’s an artificial fix. It’s a short-term “kick the can down the road fix.” Regarding money printing, those who claim that it’s going to generate activity in the economy and it will not be inflationary because it will somehow be magically absorbed by new products/business/markets are completely illogical. To suggest that the trillions of euros, dollars, and yens are not going to rob the basic value of each denominated piece of currency that is already out there, is like saying that lighting a match next to a pen of gas is not dangerous.

China will overtake India in overall Gold demand:
China’s Gold demand is expected to grow 1% this year to a record of around 860 tonnes, the global head of metals at consultancy Thomson Reuters GFMS said on Thursday, with both jewelry and investment sales rising. That increase means China will overtake India as the world’s biggest consumer of gold for the first time on a yearly basis, Philip Klapwijk told the online Reuters Global Gold Forum. “China will overtake India, both in overall demand terms and as the world’s largest jewelry market,” he said.

He said China’s jewelry demand is expected to climb to around 520 tonnes from 515 tonnes in 2011, while investment is seen at around 270 tonnes, up from 265 tonnes last year. The balance, of around 70 tonnes, is industrial consumption. China is already the main consumer of a range of commodities, including copper, coal and iron ore. It is also the biggest Gold producer, with mine output of 371 tonnes in 2011, but it still has to import large quantities of gold to satisfy domestic demand.